The fruits of labour: Efforts are under way to ensure smallholders have a bigger share of the market

The position of South Africa’s smaller farmers remains one of the key issues still facing the country. While the agricultural sector has largely maintained its output and economic value in the last five years, there has been little improvement in integrating smallholders into the wider agricultural value chain. According to the South African Press Association, the commercial farming sector, comprising 37,000 members, accounts for 90% of the country’s agricultural output, while the 25m rural inhabitants of the country produce just 10% of output through subsistence farming.

“Most primary agricultural production is controlled by large agriculture companies, and subsequently small-scale farmers struggle to compete,” Phakamani Hadebe, outgoing CEO for the Land and Agricultural Development Bank of South Africa, told OBG.

State Support

As such the government has placed a significant emphasis on supporting the growth and development of smallholder and emerging farmers. In June 2012 President Jacob Zuma said, “To achieve further success, smallholder farmers require a comprehensive agribusinesses support package, including favourable commodity pricing, access to finance, provision of technical expertise and mentorship, and contracted markets.” According to Zuma, 11,000 new smallholder farmers have been set up since 2009, with a target of around 50,000 by 2014. However, only 5381 were involved in agribusiness, while just 3910 were linked to markets. Several organisations and government bodies are working on programmes to support smallholder and emerging farmers. One project involving the Agricultural Research Council (ARC) and the Department of Rural Development and Land Reform focuses on horticultural products. These bodies are engaging more than 100 communities on this project, which will see an investment of R108m ($13.16m) over three years. The ARC has been introducing stone fruit and subtropical fruit cultivars into rural communities in the Eastern and Western Capes in a bid to bring commercialisation to farming operations in the area.

In Action

For example, in Mgwali village in the Eastern Cape, peach and nectarine cultivars were planted in 2008 on a farm bought by 13 residents of surrounding villages using a Land Bank loan. The first harvest in 2011 created a significant number of temporary jobs and brought in revenue of approximately R18,000 ($2194). These small-scale interventions are highlighted as a way in which the issue of training and support for emerging farmers that have secured land can succeed. Given the low success rate of farms acquired under land redistribution (90% of which are not currently productive), such programmes are important.

The ARC has been expanding its programmes with the subtropical fruits project in the Eastern Cape, expanding from 13 villages to 52 and planting 100,000 trees by 2011. One of its most successful programmes revolves around the Lachenalia flower. Since 1997, when the flower was first planted on a plot of 300 sq metres, the project in Nieuwoudtville has grown to an annual production of 1m bulbs. Most of this has been exported to the Netherlands, with the ARC supporting the marketing of the product in this country. The ARC believes that there is a global market for 20m bulbs a year for this indigenous flower.

Small Is Beautiful

The project highlights the ARC approach of building up projects from a small base, using new cultivars and research benchmarks to develop commercialisation in local rural communities. On the whole, its emphasis has been on horticultural projects, an area that lends itself more easily to smaller players.

Indeed, in its bid to strengthen smallholder development, the government has increased its focus on horticulture. According to Aart-Jan Verschoor, the senior manager for economic and biometrical services at the ARC, “If you want to plant maize, you need 1000 ha.

Horticulture, on the other hand, is applicable when land is a constraint.” As such, given the issue of land reform, horticulture allows the government to push ahead with projects aimed at a transformation of rural communities without a full resolution of the land reform issue. As the ARC annual report for 2011-12 notes, “There is a widely-held belief in South Africa that commercial farming is not viable without five to ten hectares of land. But the ARC project has proved that intensive farming on a small piece of land is not just possible but can really change the lives of people and communities.”

Building Networks

Beyond productivity and farming skills, smallholder development requires a greater emphasis on building linkages with both the input and output markets, allowing farmers access to things such as fertiliser and to markets where products can be sold. One potential programme to support this is the $151.6m South African Market Led Smallholder Agricultural Development Programme funded by the International Fund for Agricultural Development (IFAD) project. Scheduled to start in 2014, the eight-year programme would support a number of areas of community development primarily in Eastern Cape, KwaZulu-Natal, Limpopo and Mpumalanga, provinces that account for 59% of the country’s rural population and two-thirds of the rural poor. Support services would focus on better integration of smallholder farmers into agricultural supply chains, strengthening market linkages. IFAD will provide a $23.62m loan, the Spanish Food Security Co-financing Facility Trust Fund will provide $30m, while the private sector is set to contribute $8.5m. Other co-financers are expected to come onboard in 2013.

Go Organic

The Department of Trade and Industry (DTI) has also been working to support commercialisation and available linkages for smallholder farmers. The DTI has been working with retailers such as Pick ‘n’ Pay, Shoprite Checkers and Spar to encourage them to buy from small-scale farmers. This is evident in the organic segment. The DTI has earmarked the organic segment as an area where smallholder farmers can gain traction and market share. The DTI has been working on standards and certification in this field, a move that has included funding for the organic certification of small-scale farmers by certification providers that are acceptable to the country’s retailers.

According to the Department of Agriculture, Forestry and Fisheries’ National Policy on Organic Production, as of 2005, organic produce in South Africa was estimated to be worth between R200m ($24.38m) and R400m ($48.76m), with less than half of this certified. As of 2006, there were 250 organic farms and 45,000 ha of certified organic cultivated land in the country, which accounted for about 0.05% of South Africa’s total agricultural area. The DTI’s push to promote certification of smallholders and the sale of goods to local retailers should help to push these figures upwards. In March 2012 the DTI launched the first phase of the Organic Farmer/Retailer Programme. A joint venture between the DTI, Pick ‘n’ Pay, Shoprite and Spar, the programme aims to ensure shelf space for organic products, with the DTI working to ensure that retailers offer sales price parity with non-organic products. Pick ‘n’ Pay was the first retailer to agree to offer dedicated shelf space for organic products at 50 stores countrywide.

Encouraging Steps

All these programmes should help to stimulate the smallholder sector and lead it towards commercialisation. However, the long-term success of such ventures will also depend on smallholder farmer’s self-sustainability. Perhaps the number one concern in this regard is financing. John Purchase, the chief executive of the Agricultural Business Chamber, told OBG, “In the commercial sector, financing works very well primarily through the commercial banks. Their investment has grown considerably and all have focused agribusiness sections.” For smallholder farmers, financing is not quite as readily available. In this sector, the Land and Agricultural Development Bank of South Africa, a development finance institution established in 1912 to support the development and transformation of the agricultural sector, is the most active lender. In July 2012 the bank entered into a R1bn ($121.9m) funding agreement with the African Development Bank to support both emerging and commercial farmers in South Africa. The Land Bank will repay the loan over 15 years. Moraka Makhura, the head of Agricultural Economic Research and Innovation Services at the Land Bank, said, “The loan includes a two-year grace period on repayment, which enables us to provide funding to emerging famers that is tailor-made to their specific cash flow requirements. Emerging farmers are not generating cash straight away, so typical financing mechanisms aren’t always suitable. This offers a grace period in both capital and interest components of the loan until the project or farm starts generating cash flow to service the debt. This sort of funding is ideal and means the loan can go further.”

According to Purchase, the bank would usually lend to agribusinesses at a rate normally in the range of the prime lending rate, plus 100-200 basis points, and these companies would on-lend to smallholders at a margin of a further 100-200 basis points. As such, the cost of financing for smallholders usually is in the range of the prime lending rate (8.5% in March 2013) plus approximately 400 basis points. According to Purchase, “If you’re talking agriculture finance in African terms, the cost of financing here is certainly competitive.”